China lending allays hard landing fears

A surge in Chinese lending in January has deflected concerns of an imminent slowdown in the world’s second-largest economy but it will also fuel worries about the stability of the Chinese ­financial system.

China’s new loans rose Yuan 1.32 trillion ($239 billion), beating consensus of Yuan 1.1 trillion. Westpac analysis noted that lending is seasonally high in January, “but this was the strongest month since January 2010".

The Australian dollar rose on Monday as traders took the data as a positive signal that the economy was not being held back by tighter policy. It was fetching US90.54¢ in afternoon trade.

The bigger than expected bounce in credit may however give further ammunition to the China bears who see the economy being fuelled by cheap credit and poor loan standards.

The near default of a Chinese trust product in January has brought ­attention to the proliferation of investment products and the lack of regulation in what is known as the shadow banking sector.

ANZ China economist Li-Gang Liu does not see a sharp slowdown on the cards and thinks concerns sparked by the trust product are overdone.

“Some people tend to think after the trust product the risk of a hard landing is very big," he said. “But on the other hand, if you look at the fundamentals the economy should still move at 7 to 7.5 per cent and it appears that could be the target for the government in the coming year.

“It’s very difficult to imagine a failing in a trust product will create ­systemic risk."

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Mr Liu said a closer look at the composition of the January lending figures was warranted.

“New loans did rebound very sharply suggesting that the banks are willing to lend to the real economy," he said.

But loans between intermediaries dipped, implying the government is having some success reining in undesirable lending.

“They fell on a year-on-year basis, perhaps that [is] good news that the ­regulators’ efforts to crack down on shadow activity worked somewhat," Mr Liu said.

“We strongly disagree China is heading to a hard landing despite rising financial risk due to the excess over the GFC years."

Nomura interest rate strategist Martin Whetton does not see the People’s Bank of China revising its policy approach until the next quarterly gross domestic product reading, which will come in April. “We think they’ll wait and see," he said. “We think they’re probably still going to weaken growth over the next quarter."

He agreed that people with concerns about the quality of Chinese loans would probably take further ammunition from the latest credit numbers, but added that Chinese lenders had deep capital reserves that could be tapped in a crisis.

Barclays analysis highlighted that the result was at odds with the People’s Bank of China’s target to slow credit growth in the economy, but “this may be a reaction to the sluggish economic data and a support for the economy and market sentiment ahead of National People’s Congress". The NPC holds its annual session in Beijing next month.